United States: Federal Reserve Bank Study of Aging Demographics Suggests Retaining Older Workers Can Help Reduce Decline in Consumption Rates

In a paper discussing the consequences of population aging from a macroeconomic perspective and considering alternative paths the U.S. economy could follow in response to population aging, three Federal Reserve Bank economists conclude that, barring a significant increase in labor force participation, population aging will lead to a reduction in per capita consumption relative to a baseline in which the demographic composition of the population does not change.

Among other things, Louise Sheiner, Daniel Sichel, and Lawrence Slifman suggested that an alternative to reducing consumption is to raise output by increasing labor force participation and presented the results of simulations with higher labor force participation by the elderly. Accordingly, one of the main macroeconomic policy questions for the nation is "How much can we (and should we) raise labor force participation?"

In all likelihood, a rise in participation rates for workers aged 55 and over would be necessary. An increase of this magnitude would probably require major adjustments to both business and government policies. For example, businesses could re-structure their operations to include more opportunities for part-time or flexible work schedules, which are often appealing to older workers, or the government could make adjustments to such things as the age at which workers are first entitled to receive Social Security benefits (the early retirement age) and the age at which they are eligible to receive Medicare as well.

Source: The Federal Reserve Bank Finance and Economics Discussion Series 2007-1: "A Primer on the Macroeconomic Implications of Population Aging" (January 16, 2007)